On the Horizon in 2019: Opportunity Zones
Happy New Year, everyone. And welcome back to the grind in beautiful Boulder, Colorado. To kick things off, we are taking a look at a topic that may come up for you this year.
You’ve probably heard the words buzzing around… Opportunity Zones. The 2017 tax reform package (Tax Cuts and Jobs Act) enacted the program, which provides tax incentives for investments in opportunity zones, so designated due to their persistently depressed growth. Investors who buy, develop and hold properties for at least 10 years pay no capital gains taxes upon the property’s sale, among other incentives.
Across the country, there are currently 9,000 opportunity zones representing 35 million residents. In Boulder, the opportunity zone covers a large area between 119 Diagonal Highway (Iris Avenue) to the north, Arapahoe Avenue to the south, 28th Street to the west and 55th Street to the east. The area includes the Diagonal Plaza, a distressed commercial area that has long been ripe for redevelopment.
However, in Boulder, the city council has voted to place a temporary ban on development of properties within the opportunity zone. The city has said it will “suspend the acceptance of building permits, site review applications and other development applications” designated for office, medical, or financial use as well as the demolition of any multi-family or commercial floor area. Nevertheless, outside of Boulder, there are a handful of other opportunity zones in the county with less restrictive opportunities for development.
Critics of the federal program (including some Boulder city council members) worry that while it will incentivize investment, it might not be the best kind of growth for communities. Smart Growth America, a coalition of community advocacy organizations, ranked opportunity zones based on their potential to deliver triple bottom line value (good for communities, the environment, and investors) and found that only 2 percent meet their minimum requirements. Critics also argue that the selection criteria for opportunity zones was arbitrary and input from elected officials was disproportionately weighted.
Further, some investors do not believe the high risk of development in distressed zones is offset enough by the tax incentive, especially when other tools like 1031 exchanges are still available to them.
Nevertheless, data from CoStar suggests the volume of leasing and sales activity in opportunity zones has spiked since the reform was passed. Colorado has 126 zones and the state recently launched a website that connects investors with deals in opportunity zones to meet the demand for eager investors.
We will continue to watch this program closely and help our clients navigate its unknown waters.